Basic concepts underlying ABREMA
ABREMA integrates the three descriptive concepts of the audit objective, information misstatements and audit stages, with the two theoretical concepts of cognitive decision making and audit risk. These basic concepts are outlined below.
Note: Links to auditing terms underlying the five basic concepts are organized in a hierarchical manner. For example, the first basic concept (the audit objective) only contains links to terms relevant to that concept; the second basic concept (management assertions) contains links to terms relevant to that concept, plus terms relevant to preceding concepts - in this case, just the first concept. Similarly, the third and fourth concepts contain links to terms relevant to the particular concept as well as relevant links to terms relating to preceding concepts. Tha last concept (cognitive decision making) contains links to that concept plus relevant links to terms relating to all other concepts. This perspective is particularly useful to students of auditing.
1. Concept of the audit objective
The objective of the audit of any information prepared by a particular party, including financial statement information prepared by management, is to gather and evaluate evidence of sufficient quantity and appropriate quality in order to form, and communicate to the users of the information, an opinion on the reliability of the underlying assertions made by the party preparing the information, for the purpose of adding credibility to those assertions. More ..
2. Concept of management assertions
Management impliedly assert that the financial statements do not contain any material misstatements. All misstatements can be categorized into one of three categories - completeness, validity or accuracy. Broadly speaking, a misstatement of completeness occurs when an item which should be included is not included; a misstatement of validity occurs when the information includes an item that should not be included; a misstatement of accuracy occurs when the information includes an item that should be included, but it is not included accurately. Thus, management impliedly asserts that the financial statements are, in all material respects, complete, valid and accurate. More ..
3. Concept of audit risk
Audit risk is the risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated. There are two concepts of audit risk: the acceptable level of audit risk, which is based on the expected reliance on the financial statements by users, and the achievable level of audit risk, which is based on evaluations of inherent, control and detection risks. The auditor aims is to achieve an acceptable level of audit risk; to achieve a level of audit risk that is acceptable to the auditor. More ..
4. Concept of audit stages
There are five sequential audit stages in an audit engagement that correspond to the five critical decisions made during the course of the audit. The stages (and corresponding critical decisions) are:
- client acceptance/retention stage (the decision as to whether to accept or reject a prospective client [or retain or relinquish an existing client]). More ..
- audit planning stage (the decision as to the appropriate audit approach). More ..
- control testing stage (the decision as to the extent to which reliance on information system controls continues to be appropriate). More ..
- substantive testing stage (the decision as to the extent of misstatements in the data underlying the information presented to information users). More ..
- opinion formulation stage (the decision as to the appropriate audit opinion on the information presented to information users). More ..
5. Concept of cognitive decision making
Auditors, when performing the critical decisions referred to in each of the audit stages, undertake a structured set of activities that correspond with the concepts of human information processing (HIP) theory as they relate to cognitive decision making. The audit activities (and their corresponding HIP activities) are:
- planning activities (hypothesis generation). More ...
- evidence gathering activities (information search). More ..
- evidence evaluation activities (information evaluation). More ..
- decision-making activities (choice). More ..
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